# Coastal Carolina Bancshares, Inc.: Form 10-Q for the period ended Mar 31, 2009

- Company: [Coastal Carolina Bancshares, Inc.](/companies/ccnb.md) (CIK 1437213)
- Form: 10-Q
- Filed: 2009-05-15
- Accepted by EDGAR: May 15, 2009, 12:32 ET
- Period: 2009-03-31
- Accession: 0001104659-09-033033
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1437213/000110465909033033/a09-11586_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1437213/000110465909033033/

## Management's discussion and analysis

As filed, 22,927 characters.

The following is our discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. This commentary should be read in conjunction with the financial statements and the related notes and the other information included in this report.

### Forward-Looking Statements

This report on Form 10-Q contains “forward-looking statements” about us and our operations, performance, financial conditions and likelihood of success. These statements are based on many presumptions and estimates. Our actual results will depend on a number of factors, including many that are beyond our control. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “hope” and “estimate,” as well as similar expressions, identify forward-looking statements. Because forward-looking statements involve risks and uncertainties that are beyond our control, actual results may differ materially from those expected in the forward-looking statements. The following includes, without limitation, some of the risks that we expect to encounter in starting and operating the new bank:

- our lack of operating history;
- potential delays in the opening date of the Bank;
- significant increases in competitive pressure in the banking and financial services industries;
- changes in the interest rate environment, which could reduce anticipated or actual margins;
- changes in political conditions or the legislative or regulatory environment;
- general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;
- changes occurring in business conditions and inflation;
- changes in technology;
- the level of allowance for loan losses and the lack of seasoning of our loan portfolio;
- the rate of delinquencies and the amounts of charge-offs;
- the rates of loan growth;
- adverse changes in asset quality and resulting credit risk-related losses and expenses;
- changes in monetary and tax policies;
- loss of consumer confidence and economic disruptions resulting from terrorist activities;
- changes in the securities markets; and
- other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on the Company. During 2008 and the first part of 2009, the capital and credit markets have experienced extended volatility and disruption reaching unprecedented levels. There can be no assurance these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.

All forward-looking statements in this report are based on information available to us as of the date of this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

### General

The Company was incorporated on February 28, 2008, to organize and own all of the capital stock of a proposed new national bank to be named Coastal Carolina National Bank (the Bank). On April 10, 2008, the Company merged with our predecessor, Coastal Carolina Dream Team, LLC, a limited liability company formed by our organizers in June 2007 for the purpose of investigating the possibility of establishing a new community bank in Myrtle Beach, South Carolina. On February 22, 2008, our organizers filed applications with the OCC to charter the Bank as a national bank and with the FDIC to receive federal deposit insurance. The Bank received preliminary conditional approval from the OCC on June 20, 2008 and received conditional approval from the FDIC on October 1, 2008. The Company filed for approval from the Federal Reserve to become a bank holding company and acquire all of the stock of the Bank upon its formation, and received that approval on November 21, 2008. Whether the charter is issued and deposit insurance is granted will depend upon, among other things, compliance with legal requirements imposed by the OCC, the FDIC, and the Federal Reserve, including capitalization of the Bank with at least $17.5 million of capital, net of organizational and pre-opening expenses. We hope to receive all final regulatory approvals and open the Bank during June 2009.

### Financial Condition and Results of Operations

At March 31, 2009, we had total assets of $15.7 million, consisting of $14.7 million in restricted cash for stock subscriptions received and escrow interest earned, deferred stock issuance costs of $483,000, premises and equipment, net of accumulated depreciation, of $420,000, and other assets of $68,000. At December 31, 2008, we had total assets of $3.2 million, consisting of $2.4 million in restricted cash for stock subscriptions received and escrow interest earned, deferred stock issuance costs of $337,000, premises and equipment, net of accumulated depreciation, of $448,000, and other assets of $52,000.

At March 31, 2009, we had total liabilities of $17.6 million, consisting of stock subscriptions received of $14.7 million, the outstanding principal balance on line of credit borrowings of $2.2 million, advances from our organizers and founders of $620,000, and accrued expenses and other liabilities of $127,000. At December 31, 2008, we had total liabilities of $4.8 million, consisting of stock subscriptions received of $2.4 million, the outstanding principal balance on a line of credit of $1.6 million, advances from organizers and founders of $620,000, and accrued expenses and other liabilities of $152,000.

During the three months ended March 31, 2009, we had a net loss of $388,000, with income comprised of interest income received on escrow subscriptions of $30,000 and a leasehold improvements allowance from our landlord of $12,500. Expenses incurred consisted of payroll, taxes, and employee benefits of $265,000, office and occupancy expenses of $93,000, interest on lines of credit borrowings of $19,000, professional and marketing fees of $15,000, corporate insurance of $8,000, and other expenses totaling $30,000. During the three months ended March 31, 2008, we had a net loss of $295,000, with income comprised of interest income of $600. Expenses incurred consisted of payroll, taxes, and employee benefits of $126,000, office and occupancy expenses of $43,000, professional fees of $83,000, marketing and business development fees of $30,000, and other expenses of $14,000.

For the period June 20, 2007, date of inception, to March 31, 2009, we had a net loss of $1.9 million, resulting from expenses incurred in connection with activities related to the Company’s organization. Income was comprised of interest income received on escrow subscriptions of $38,000 and a leasehold improvements allowance of $25,000. Expenses incurred consisted of payroll, taxes and employee benefits of $1 million, professional and marketing fees of $399,000, office and occupancy expense of $374,000, interest expense on our line of credit of $39,000, corporate insurance of $35,000 and other expenses totaling $145,000.

Until the Company is able to release escrowed subscription funds, organizational expenses and costs to raise capital are being funded by advances from our organizers and founders and by lines of credit. The Company has a $2 million line of credit that bears interest at a floating rate equal to Wall Street journal prime less 1.50 percent, but not less than four percent, that matured on April 1, 2009, at which time the Company renewed the line of credit at a new variable rate of interest at the three-month LIBOR rate plus a margin of 1.65 percent, with a floor of 5.50 percent. On January 29, 2009, the Company established an additional $1 million line of credit with a bank to fund continued operating expenses during the organization of the Company and its proposed banking subsidiary, the Bank. The line bears a variable rate of interest at the three-month LIBOR rate plus a margin of 1.65 percent, with a floor of 5.50 percent. Both lines mature July 29, 2009. Interest on both lines of credit is due on a monthly basis and the unpaid principal balance is due at maturity. The lines of credit are uncollateralized and have a limited guaranty by the 21 organizers.

In order for us to become profitable, we will need to attract a large number of customers to deposit and borrow money. This will take time. We expect to incur losses for at least our first two years of operations. Our future profitability is dependent on numerous factors, including the strength of the economy both nationally and in our market area and government regulation. As a highly regulated institution, the Bank’s ability to grow and achieve profitability may be adversely affected by state and federal regulation that limits a bank’s right to make loans, purchase securities and pay dividends. Although we hope to become profitable in our third year of operation, there is a risk that a deterioration of the economy or adverse government regulation or other conditions could adversely affect our plans. When we open for business, we expect a significant amount of our income will be from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. The Bank’s cost of money will be a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets will further influence the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses.

### Expenses

On completion of the offering and opening of the Bank, we expect we will have incurred the following expenses:

- Sales agent commissions and expenses ranging from $580,000 if the minimum offering is sold to $940,000 if the maximum offering is sold, which will be subtracted from the proceeds of the offering, assuming a commission of two percent is paid on sales of $3 million to non-excluded investors and four percent on all other sales to non-excluded investors. If our sales agent received the maximum commission of 5 percent of the gross proceeds on all sales over $6 million, its commissions and expense would be $790,000 in the event of the minimum offering and $1.24 million in the event of the maximum offering.
- $325,000 in expenses of the offering, which will be subtracted from the proceeds of the offering.
- $50,000 to $100,000 in expenses to organize Coastal Carolina Bancshares, Inc. and $1.8 million to $2 million in expenses to organize and prepare to open Coastal Carolina National Bank, consisting principally of salaries, consulting fees, legal fees, other professional fees and operating costs of the main office. These costs will be expensed against the initial opening period results. Additionally, costs of approximately $550,000 will be incurred for premises and equipment, including leasehold improvements, for the main office. These costs will be capitalized and amortized over the life of the lease for the leasehold improvements and depreciated over the estimated useful lives of the furniture, fixtures and equipment.

Prior to our completion of the offering, these costs will be funded by non-interest-bearing advances from our organizers and one non-organizer founder, draws on our two lines of credit that bear interest at a variable rate of interest equal to the three-month LIBOR rate plus a margin of 1.65 percent, with a floor of 5.50 percent, per annum, and are guaranteed by our organizers, and tenant up-fit allowances. We will use the proceeds of the offering to repay the organizer and founder advances (except those applied to the purchase of shares) and the amounts due under our lines of credit. We will use the remaining proceeds to make loans, purchase securities and otherwise conduct the business of the Bank and the Company. Our business plan contemplates a new main office to be built and occupied in the fourth year of operation. Additionally, one branch office is planned. It is anticipated the branch will open in the third year. We anticipate the proceeds of the offering will be sufficient to satisfy the Company’s and the Bank’s financial needs for at least the next three years.

### Liquidity, Interest Rate Sensitivity and Capital Resources

As of March 31, 2009, the Company had not commenced banking operations. When we open for business, we expect a significant amount of our income will be from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. The Bank’s cost of money will be a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets will further influence the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses. Movements in interest rates will cause our earnings to fluctuate. To lessen the impact of these margin swings, we intend to structure our balance sheet so we are able to reprice the rates applicable to our assets and liabilities in roughly equal amounts at approximately the same time. We will manage the Bank’s asset mix by regularly evaluating the yield, credit quality, funding sources and liquidity of its assets. We intend to manage the Bank’s liability mix by expanding our deposit base and converting assets to cash as necessary. If there is an imbalance in our ability to reprice assets and liabilities at any point in time, our earnings may increase or decrease with changes in the interest rate, creating interest rate sensitivity. Interest rates have historically varied widely, and we cannot control or predict them. Despite the measures we plan to take to lessen the impact of interest rate fluctuations, large moves in interest rates may negatively impact our profitability.

For an opening bank, liquidity represents the ability to provide steady sources of funds for loan commitments and investing activities, as well as to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. Initially, we expect a portion of the net proceeds of our public offering will be available for working capital purposes and will provide funds for these purposes. In addition, we can obtain these funds by converting assets to cash or by attracting new deposits. Through our banking operations, our ability to maintain and increase deposits will serve as our primary source of liquidity.

We have established revolving lines of credit amounting to $3 million, and received cash advances from our organizers and founders totaling $620,000 and tenant upfit allowances of $25,000 from our landlord. We have used those sources of funds to pay offering, organizational, and pre-opening expenses. We believe that the minimum proceeds of $21 million from the offering will satisfy the cash requirements for at least the first three years for both the Company and the Bank. Specifically, we anticipate the Bank’s assumed minimum initial capitalization of $19.3 million will allow the Bank’s loan portfolio to grow at a reasonable pace and be sufficient to pay operating expenses during the first three years of operations, while maintaining capital levels that comply with banking regulatory guidelines. Following the completion of the offering, we will manage our liquidity by actively monitoring the Bank’s sources and uses of funds to meet cash flow requirements and maximize profits. We do not anticipate we will need to raise additional funds to meet the required operating expenditures for the Company and the Bank over the next 12 months. All anticipated material expenditures for such period, including salaries, furniture, fixtures, and equipment expenses, and leasehold improvements, have been identified and provided for out of the proceeds of the initial offering. We do not anticipate the Bank will pay any dividends to the Company or that the Company will pay any dividends to its shareholders in the foreseeable future.

We expect to complete our organizational activities and commence banking operations during June 2009. Any delay in opening the Bank will increase our organizational and pre-opening expenses and postpone our realization of potential revenue. We anticipate these costs will range from $175,000 to $200,000 each month the opening of the Bank is delayed. Delays may occur as a result of, among other things, our inability to achieve the minimum offering of $21 million. If we experience an extended delay in opening the Bank, we may be required to seek additional borrowings, whether through increasing our existing lines of credit or through an additional line of credit with another lender. There can be no assurance we will be able to obtain such financing on satisfactory terms. In addition, we may need to raise the minimum offering amount to cover expenditures resulting from a delay in opening.

If we are unable to raise the minimum proceeds of $21million from the offering (including approximately $620,000 in cash advances from our organizers and non-organizer founder, which may be converted to subscriptions for common stock in the offering), we will use the cash advanced by our organizers and non-organizer founder to pay expenses, and each organizer will be responsible for any amounts due under our lines of credit up to the amount guaranteed by such organizer.

### Capital Adequacy

Capital adequacy for banks and bank holding companies is regulated by the OCC, the FDIC and the Federal Reserve. The primary measures of capital adequacy are risk-based capital guidelines and the leverage ratio. Changes in these guidelines or in our levels of capital can affect our ability to expand and pay dividends.

### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

### Recently Issued Accounting Standards

The following is a summary of recent authoritative pronouncements that may affect our accounting, reporting and disclosure of financial information.

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141(R), *Business Combinations,* (SFAS 141(R)) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

In May 2008, the FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted Accounting Principles* (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 is effective November 15, 2008. The FASB has stated it does not expect SFAS 162 will result in a change in current practice. The application of SFAS 162 had no effect on the Company’s financial position, results of operations or cash flows.

In October 2008, the FASB issued FSP SFAS 157-3, *Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active* (FSP SFAS 157-3). This FSP clarifies the application of SFAS No. 157, *Fair Value Measurements* in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. The application of FSP SFAS 157-3 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

FSP EITF 99-20-1, *Amendments to the Impairment Guidance of EITF Issue No. 99-20*, (FSP EITF 99-20-1) was issued in January 2009. Prior to the Staff Position, other-than-temporary impairment was determined by using either EITF Issue No. 99-20, *Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets*, (EITF 99-20) or SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*, (SFAS 115) depending on the type of security. EITF 99-20 required the use of market participant assumptions regarding future cash flows regarding the probability of collecting all cash flows previously projected. SFAS 115 determined impairment to be other than temporary if it was probable that the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more consistent determination of other-than-temporary impairment, the Staff Position amends EITF 99-20 to determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing management to use more judgment in determining any other-than-temporary impairment. The Staff Position is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retroactive application is not permitted. The application of FSP EITF 99-20-1 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

## Controls and procedures

As filed, 1,397 characters.

The Company’s disclosure controls and procedures are designed to ensure information required to be disclosed under the Securities Exchange Act of 1934 (the Exchange Act) is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report and pursuant to Rule 15d-15 of the Exchange Act, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of the Corporation’s disclosure controls and procedures (as that term is defined in Rule 15d-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing, and reporting information required to be disclosed by the Company, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Filed May 15, 2009.
Source: SEC EDGAR, the filing index for accession 0001104659-09-033033. Last ingested by Listed: Oct 24, 2026, 15:08 ET. No prices; not investment advice.